Kings of con-men: A warning on investing in a ‘sure thing’

Gregor MacGregor, Bernie Madoff: Kings of con-men

Most people would consider Bernie Madoff to be the biggest scam artist of all time. After all, his Ponzi investment scheme ran for decades, and sucked in billions without, apparently, ever even making any actual trades for investors.

Madoff’s victims were embarrassed, saddened and shocked. However, their embarrassment must pale in comparison to those sucked in by another scammer, one Gregor MacGregor. The Economist recently highlighted the misadventures of Mr. MacGregor. It is a fascinating story and deserves a recap. At the very least, reading the Scotsman’s exploits will make you feel better the next time one of your investments goes horribly awry.

What’s more, there is a lesson to be learned: Maybe the next time you are about to invest in a “sure thing,” you might want to pause and think again, because surely Mr. MacGregor’s victims thought the same thing too before losing it all.

According to The Economist, Mr. MacGregor’s bond swindles in the 1800s would equate to about US$7-billion in today’s dollars. But he did more than take cash: He “invented” an entire country.

Mr. MacGregor claimed he was a prince of a country called Poyais, which today is Honduras. The country, he claimed, had abundant natural resources and only needed money and manpower to develop them to reap untold riches.

His plan worked so well that, incredibly, he managed to raise a lot of money as well as convince people to immigrate to a non-existent country.

Now, that should never happen in this day, when a quick Internet search would surely root out Mr. MacGregor’s most blatant lies, but some of the conditions that enabled him to fool people are the same today.

Back then, like today, the British Government was borrowing a lot of money. Because of low interest rates, investors began looking elsewhere to raise their investment returns. British bond investors went to Russia and Denmark to get 5% returns rather than the paltry sums in London. Mining companies also started to do well, enticing investors into that sector.

As rates stayed low, investors strayed further from home and started to invest in Brazil, Columbia and Mexico. Investors were desperately hunting for returns.

The Economist picks up the tale:

“MacGregor rode this wave of Latin American optimism. In October 1822 he offered up a fake £200,000 Poyais bond at 6%, a similar rate to that paid by the governments of Peru, Chile and Colombia. Unlike these countries, Poyais had no record of collecting taxes or system for doing so. But MacGregor argued that Poyais was so abundant in natural resources that export-tax revenue would easily cover the interest payments on the debt”.

Further, Mr. MacGregor convinced many that Poyais was a nice, friendly farmable land in need of settlers. He convinced them it was an even better place to emigrate than the United States. He also told investors and settlers that Poyais’s water supplies were not just clean, clear and abundant, but its streams were filled with chunks of gold. Bizarrely, he was able to raise more and more money even as his lies grew bigger.

All in, Mr. MacGregor convinced seven shiploads of investors and settlers to set sail for a fake country. After the first two ships reached shore and realized over time that they had been had, the British Navy had to intercept the other five ships at sea to them turn back. There are so many lessons here for today’s investors.

Related

First, maybe investors should stop “reaching for yield.” Many investors are getting burned on dividend-paying resource stocks that are now being forced to cut dividends. Guess what? When you get a higher yield, you need to ask yourself why? Usually, it is because there is way more risk.

Third, don’t get greedy. Mr. MacGregor’s victims would not have fallen for the plan if they could accept lower returns.

Finally, like streams filled with gold, if it sounds too good to be true, it usually is. This rule of thumb has, of course, been around for centuries, but, for some reason, investors constantly — and we mean constantly — ignore it.

Always pay attention. Don’t find yourself the victim of the next fraudster that shows up in our capital markets.

Peter Hodson, CFA, is CEO of 5i Research Inc., a conflict-free independent investment research network.

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.

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